Bank of Finland Sees Deeper Slump in Northernmost Euro State

Finland is sinking into a deeper recession as the nation’s main industries -- already battered by the debt crisis further south -- struggle to stay competitive, the Bank of Finland said.

“The Finnish economy has been contracting since the first half of 2012 and the outlook for the immediate years ahead remains poor,” Governor Erkki Liikanen, who is also a member of the European Central Bank’s governing council, said in a report published in Helsinki today. The economy “has faced two major changes at the same time: the restructuring of Finnish industry and the recession in the wake of the financial crisis.”

Gross domestic product will shrink 0.8 percent this year and grow 0.7 percent in 2014 before expansion accelerates to 1.4 percent in 2015, the Bank of Finland said. It had forecast growth of 0.4 percent this year and 1.5 percent next year on Dec. 13. Private spending will fall 0.9 percent this year and private fixed investment will drop 3.6 percent.

Finnish output is suffering from the decline of its paper industry and a drop in sales of electronics, including Nokia Oyj’s mobile phones. Industrial production dropped an annual 9.7 percent in April, the most since November 2009, the statistics office said yesterday. Exports, which contracted 1.4 percent last year, will rise 1.2 percent this year.

Domestic demand, which held up during Finland’s 2009 recession even as the economy contracted 8.5 percent, is no longer sustaining growth.

“Problems in the economy that were previously thought to be temporary, cyclical phenomena, have now been shown as more permanent and structural in nature,” Liikanen said.

Rising Unemployment

Unemployment will rise to 8.5 percent in 2013 and 8.6 percent in 2014 from 7.7 percent last year, the bank said. About 8.3 percent of working-age people in Finland won’t have a job in 2015, the bank said. Inflation, including house prices and borrowing costs, will slow to 1.7 percent this year, before accelerating to 1.9 percent in 2014 and in 2015.

“The marked deterioration in the economic situation makes it harder to restore the health of the public finances,” the central bank said. “Fading private consumption and declining employment will reduce tax revenues and increase unemployment expenditure.

The Finnish government’s budget deficit will widen to 2.5 percent of GDP this year from 2.3 percent in 2012, the central bank said. It had earlier forecast a narrowing to 1 percent of GDP this year and 0.8 percent next year.

Redirecting Spending

The government could redirect spending within a “sustainable” framework to boost the growth outlook in the longer term, Liikanen said. That could mean investments that don’t displace private-sector business, he said.

The government won’t reach its goal of stopping debt growth by 2015 with the 600 million euros ($797 million) of fiscal tightening announced in March, the central bank said. Debt will rise to 61.8 percent of GDP in 2015 from last year’s 53 percent, the bank said. That would breach the European Union’s 60 percent rule.

“Halting further debt accumulation will therefore require additional efforts,” the bank said. “Now it looks like the 60 percent ceiling will be breached.”

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